Options

Options

The options are introduced for Hedging the portfolio. Before going to options just understand basics of   the stocks.  The stock is a ownership in a  company and it measured in Shares. If the company going strong the stock price go up, once you buy it it is your until you sell it. The only thing is that if the price goes up than only you can make money else you sell at loss or you can hold for years.  The buying a stock is Debit your account and when sell the same you will get the credit.  When you buy stock it is called "long in stock" or simply say long.  When you sell the stock you have is called "Sell".  When you buy a stock, you are expecting the stock price go up.  If before buying you expect the price will fall what you do. You may miss the opportunity to make money.  You can sell the stock with out holding and the same buy later, this is called "Short".  This is the difference between "sell" and "short".  Stock buying and shorting both have potential profit or loss. Every trade has three phases,  open, manage and close.  The risk is very high in both buying and selling. Trading stock relatively very expensive. Trading stock no defined time frame.  How to minimize the risk  and make profit.  Here the options came in to market.

So you understand stocks as long-term or short term  investments that can be bullish and bearish. 

Why do we trade options?  

We use options because they aren’t just directional like stocks. They’re more flexible and allow more advanced strategies that play on probabilities. Also, they’re cheaper than stock, so your trades can make a bigger impact for the same usage of capital.  The biggest difference is that you can set the price and the time period of your trade.  The advantage of options, logical, strategic, flexible, leverage and less expensive.

The Options Basics:  

The option is a contract to buy or sell an underlying asset for  agreed  price and  time .  The underlying asset can be stock, future, Index etc..  The price to buy or sell the underlying is called the " STRIKE PRICE "  .   The end date of contract is called " EXPIRATION".  No of shares is called the "LOT" .

In a nut shall, An option is contract that lets the owner to buy or sell an underlying asset at Strike price until expiration.    

The Types of Options :  CALL  and  PUT

The "CALL"  is a contract to buy a stock ( Underlying Asset) .  

The  " PUT " is a  contract to sell a stock  ( Underlying Asset ).   

The "CALL" give the owner ( buyer ) the right to buy the underlying asset ( stock ) for a set price and set time. 

The  "PUT" give the owner ( buyer )  the right to sell the underlying asset ( stock ) for a set price and set time. 

The options have their own price { called the "PREMIUM" ), we can buy or sell the calls and puts themselves.  The option traders more interested in this price then the stock price. 

Example :

Underlying            Strike Price    Lot Size         Expiry             option type   Premium

NIFTY                    10500               75          28th, Mar.,2019       CALL           55

NIFTY                    10400               75          28th  Mar.,2019        PUT             45 

The Options Mechanics :

The stock price is not only thing that drives the option price.  The most important is the TIME to the expiration,  this is called the Time Decay .  In calls, If the stock price is above the strike price is called ITM ( in the money ), rest of time it is called OTM (out of the money).  In puts, if stock price is below the stock price is called ITM  ( in the  money ), rest of the time it is called OTM ( out of money ).  The call price go up when the stock price go up. The put price go up when the stock price go down.   Calls are ITM when the stock price is higher than the call's strike  price.  Puts are ITM  when the stock price is below the puts strike price.  All options lose their value over the time  (  Time Decay ).

The simplest position a trader can get into is buying a call, which is very similar to being long a stock. As the stock goes up in price, the call goes up as well. The differences between a call and a stock position are that a call only makes money when the stock goes up. If the stock stays the same or goes down in price, the call will expire worthless and the buyer loses what they paid for it.

Buying calls opens with debit. The initial debit is the maximum loss. Buying calls make money when the stock price goes up.  The call buyer wants the call be ITM at expiration. The call buyer closes the position by placing the sell order.  The call buyer has limited Risk and unlimited profit potential. 

A put, just like a call, has a few great upsides: you can’t lose more than you spend on the contract, your max profit is unlimited and it is easy to understand when you make money. What makes a put different than a call is that a put makes money when a stock goes down in price; it’s pretty much the opposite of a call in this regard.  

Buying puts opens with debit. The initial debit is the maximum loss. Buying puts make money when the stock price goes down.  The put buyer wants the put be ITM at expiration. The put buyer closes the position by placing the sell order.  The put buyer has limited Risk and unlimited profit potential. 

The terminology used for selling a call or put is " Writing ".   When we write a contract (sell), the max profit we can have is the amount someone pays us for it (the credit received).

The Selling calls opens with credit. The initial credit is the maximum profit. Selling calls make profit when the stock price goes down or neutral. The call seller wants to be OTM at expiration. The call seller closes the trade by placing buy order. The seller has limited profit potential and unlimited risk.

Selling a put sees a profit when the stock price goes up or stays the same at expiration. The loss points are when the position goes ITM, or when the stock price goes below the strike price.  

The Selling puts opens with credit. The initial credit is the maximum profit. Selling puts make profit when the stock price goes up or neutral. The call seller wants to be OTM at expiration. The call seller closes the trade by placing buy order.  The put seller closes the trade by placing buy order.  The seller has limited profit potential and unlimited risk.

As option buyer ( call or put ) Limited risk, unlimited profit and the probability is 33 % .   As  option seller ( call or put ) Limited profit, unlimited risk and the probability is 66 %.   

Together, this gives us 4 different ways to trade on any underlying with two ways to play either a downward or upward movement.

We know that is has been a long journey to get here but before we throw you to the wolves, or bears, we want to make sure that you know what makes a trade great compared to good. The first thing we look for in a great trade is liquidity.  Liquidity is how easy it is to get in and out of a trade, so we can get in at the price we want and get out when we want to. Remember that there has to be someone who wants the opposite order you are placing in order for your position to get filled. Higher liquidity means more contracts are being traded and that is good for us so we can get ours in.

The Volatility:

Volatility and Implied Volatility are one of the most important factors in placing a great trade. Volatility is an indication of how much a price can move and has no connection to directional movement. Historical volatility works to keep in mind that even if an underlying has been at the same price it was a year ago, its volatility could be large because of the change it has seen between that time frame. 

Implied volatility is a predication of the price movement into the future by the market. Since options are short term price speculation, IV greatly affects option pricing. We take advantage of this at  by selling options in high Implied Volatility for greater prices. 

Knowing about volatility is how we can put on great trades. 

To learn more about Options and Option Strategies contact : whatsApp : +91 939 100 2940